“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, May 21, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

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Option Trade – Wal-Mart Stores Inc. (NYSE:WMT) Calls

Monday, May 21, 2018

** OPTION TRADE: Buy the WMT JULY 20 2018 85.000 CALL at approximately $2.10. Place a pre-determined sell at $4.20.

Also include a protective stop loss of $0.85.

Mega retailer Wal-Mart Stores Inc. (NYSE:WMT) underperformance so far this year after a strong run last year is an opportunity to buy this options trade at a discount.

Walmart's shares have gained +7.3% in the last year, outperforming the Supermarkets industry's +5.4% gain in the same time period, courtesy of its superb omni-channel initiatives. The company's robust e-commerce initiatives like buyouts, online grocery, improved delivery systems, along with store remodeling and merchandise enhancement efforts have been working well.

These trends helped Walmart post its 15th straight quarter of U.S. comps growth in first-quarter fiscal 2019, wherein earnings and sales rose year over year, with e-commerce sales up 33%. However, gross margin remains strained due to price investments and transport costs. Also, investors are somewhat jittery about the Walmart-Flipkart deal, which is expected to hurt earnings in the near term.

Nevertheless, long-term prospects from the deal look solid, which falls in line with Walmart's strategy to shift focus to profitable regions (mainly China and India). This is also reflected in Walmart's decision to merge its UK grocery arm, Asda with Sainsbury.

Also, technical analyst Frank Cappelleri of Instinet was upbeat on the world's largest retailer ahead of its first-quarter results last  Thursday. "Walmart is in a critical spot," said Cappelleri, who noted that WMT stock has suffered a four-month decline of nearly 20%. A drop-off of this magnitude has only occurred twice in the past 10 years for Walmart, once in 2009 and again in 2015, said the technical analyst. "The positive is that this led to bounces every time," said Cappelleri. He added that "Walmart is now getting close to a very interesting support line," at $80 to $82, and has "been able to bounce there over the last week or and, coincidentally, we're also near an uptrending support line—again near that 2015 low ... We like to have two areas of support together when we can as opposed to one. So, I think all those factors together could help Walmart bounce."

Influencing Factors

Shares of the Bentonville, Arkansas-based chain of discount department stores and grocery stores have been "hammered" after the firm's acquisition of Indian e-commerce company Flipkart, said Boris Schlossberg of BK Asset Management. Last week, the retail behemoth said it would pay $16 billion for a 77% stake in the online shopping platform. The managing director of FX strategy weighed in on WMT, suggesting that investors will have to stay patient with the firm's longer-term strategy. He indicated that investors "rightfully" sold off the stock as the mega-deal is going to be dilutive to earnings for the next few years given the Asian e-commerce platform will "bleed money" over that time. He pointed to the bull case for the acquisition, in which some suggest that it is a huge play on future.

CEO Doug McMillon has done an admirable job refocusing a company that had lost its momentum under prior CEO Mike Duke while repositioning the company for the future.

McMillon's plans to reinvent the company were to address Duke's biggest regret, conceding e-commerce to Amazon.com (NASDAQ: AMZN) and allowing it to become the second-largest company in the United States essentially unimpeded. It may go down as one of the biggest missed opportunities in the industry ever.

Starting with the purchase of Jet.com, Walmart has taken steps to pivot toward higher-growth e-commerce, no longer satisfied with conceding the market to Amazon. The latest announcement shows the continued Amazonification of Walmart.

According to a report from the San Jose Mercury News , Walmart is looking to hire 150 technology workers in the Silicon Valley area for its Walmart Labs subsidiary. Walmart Labs has nearly 400 job openings, with most sounding more like positions at Amazon, including data scientist, cloud computing engineer, and streaming data engineer.

While Walmart has a long-term focus to compete with Amazon for the e-commerce market, the company will continue to be defined by its brick-and-mortar retail channel. However, Walmart is looking at using technology to wring out efficiencies from its 700 million square feet of U.S. retail space. The company's Store No. 8 incubator recently purchased Spatialand , a virtual/augmented-reality company with an eye on improving the in-store shopping experience.

Analysts and Hedge Funds Opinions

Robert W. Baird set a $95.00 target price on Walmart in a report published on Thursday, May 10th. The brokerage currently has a buy rating on the retailer’s stock.

Also, Walmart‘s stock had its “neutral” rating restated by research analysts at Stifel Nicolaus in a research note issued to investors on Wednesday, May 2nd. They presently have a $99.00 target price on the retailer’s stock. Stifel Nicolaus’ price target would indicate a potential upside of 18.36% from the stock’s previous close.

Several other equities analysts have recently commented on the company…..

  • Morningstar set a $91.00 price objective on Walmart and gave the stock a buy rating in a research report on Thursday, May 10th.
  • Royal Bank of Canada reduced their target price on Walmart to $168.00 and set a market perform rating for the company in a report on Thursday, May 10th.
  • Deutsche Bank reduced their price objective on Walmart to $87.00 and set a hold rating for the company in a research note on Thursday, May 10th.
  • Telsey Advisory Group reduced their price objective on Walmart from $110.00 to $105.00 and set an outperform rating for the company in a research note on Thursday, May 10th.

Nineteen analysts have rated the stock with a hold rating, fifteen have assigned a buy rating and two have issued a strong buy rating to the company. Walmart currently has a consensus rating of Buy and a consensus target price of $97.56.

Institutional investors that have recently made a change to their positions in the stock….

  • BlackRock Inc. grew its stake in Walmart by 1.7% in the first quarter. BlackRock Inc. now owns 89,019,109 shares of the retailer’s stock worth $7,920,031,000 after purchasing an additional 1,467,055 shares in the last quarter.
  • Geode Capital Management LLC grew its stake in Walmart by 2.9% in the fourth quarter. Geode Capital Management LLC now owns 15,815,063 shares of the retailer’s stock worth $1,558,526,000 after purchasing an additional 440,989 shares in the last quarter.
  • Dimensional Fund Advisors LP grew its stake in Walmart by 1.5% in the third quarter. Dimensional Fund Advisors LP now owns 14,804,523 shares of the retailer’s stock worth $1,156,909,000 after purchasing an additional 224,821 shares in the last quarter.

  Harvey’s Options Volatility Indicator

Summary

Walmart still expects U.S. e-commerce growth of 40% this year, indicating that the fourth-quarter increase of 23% was probably just a blip. Furthermore, the Flipkart deal should pay off in the long run, as the Indian e-commerce market is expected to explode over time, reaching $200 billion by 2026.

Walmart still has many of the advantages it always had, including economies of scale and stores within 10 miles of 90% of the U.S. population, giving it a boost in e-commerce. As it adapts to the changing retail landscape, the company should remain among the industry's leaders.

Walmart has a 52-week low of $73.13 and a 52-week high of $109.98. The company has a debt-to-equity ratio of 0.46, a quick ratio of 0.20 and a current ratio of 0.73. The company has a market cap of $247.77 billion, a price-to-earnings ratio of 18.92, a PEG ratio of 2.89 and a beta of 0.54.





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